The Upside of CSR
For companies, higher levels of social performance often translate into improved access to funding.
Engaging in corporate social responsibility (CSR) is, of course, a good thing for a company to do. It’s also an image-friendly thing to do. But could it be a financially advantageous thing to do as well? Yes, as it turns out: Investors use reported data on environmental, social, and governance (ESG) practices to help make decisions on which companies to fund.
Those data have become increasingly abundant—a fact that may influence investors’ growing interest in CSR. In the mid-1990s, only about 20 companies conducted any kind of CSR reporting. Today, more than 6,000 corporations do so. “You see, on the corporate side, a lot of information being reported and a lot of activity in terms of sustainability. And then you see, on the investor side, more and more investors caring about it,” says George Serafeim, an assistant professor of business administration at Harvard Business School.
Serafeim and his colleagues had a theory: Companies that have a better record of pursuing socially beneficial activities are likely to receive better access to financing. To test this theory, the research team drew from a data set on CSR performance compiled by ASSET4, a division of Thomson Reuters; those data include ESG metrics for more than 2,400 public listed companies. To measure access to financing, the researchers used a common metric called the KZ index, which incorporates factors such as the market-to-book ratio and debt-to-total-capital ratio.
Using complex statistical methods and tools for testing the robustness of their results, the researchers performed a comparative analysis of both bodies of data. In the end, they found that stronger CSR practices did appear to result in improved access to financing.
In other words, companies that skimp on CSR are leaving value on the table, argues Katherine V. Smith, executive director of the Center for Corporate Citizenship at Boston College. “This study points out that companies that forgo longer-term perspectives about value creation may be excessively discounting the benefits of longer-term investment [in CSR].” Smith, who has cited the work of Serafeim and his colleagues in presentations on the subject, says that this research has clear bottom-line implications: “Finance professionals can start to see the business value of corporate social performance, even in very traditional profit-oriented measures.”
Investors are paying attention to CSR for various reasons. The move toward greater corporate transparency and better reporting of credible metrics has given investors keener awareness of what’s going on inside a company. But social attitudes also play a role. Two decades ago, companies weren’t expected to reduce carbon emissions, but since then that practice has become, in effect, a requirement—“almost like a license to operate,” Serafeim notes.
Of course, some companies truly excel at ESG practices, and some merely pay lip service to improving their performance in this area. The big task for investors over the next decade, Serafeim suggests, will be to find ways to distinguish between those two groups. The solution is likely to involve creating widely accepted standards for CSR reporting, as well as building regulatory institutions that help investors interpret and evaluate the increasing flow of such data. “This is a relatively under-explored domain,” Serafeim says. “People on the investment side will struggle, as they are struggling now, until these institutions are developed.”
Beiting Cheng, Ioannis Ioannou, and George Serafeim, “Corporate Social Responsibility and Access to Finance,” Strategic Management Journal, 35, January 2014.